Interest rates rose again, and this time value stocks were caught up in the selloff that growth stocks have been experiencing in recent days.
Stocks fell hard Thursday as interest rates went another leg higher. Not even strong economic data could subside the pain felt all over the market.
The Dow Jones Industrial Average fell 559.85 points, or 1.75%, to close at 31,402.01. The S&P 500 slid 96.09 points, or 2.45%, to end at 3,829.34, and the Nasdaq Composite tumbled 478.54 points, or 3.52%, to close at 13,119.43. The biggest gainer in the S&P 500 was electricity and energy infrastructure construction firm Quanta Services (PWR), which saw shares gain 4.5% after reporting fourth-quarter earnings.
Interest rates hit new highs. The 10-year Treasury yield rose to 1.55%, its highest level since early February 2020, just before the pandemic set in. The yield was below 1.4% at Tuesday’s close, and at 1.1% in the beginning of this month. Higher yields on safe bonds make riskier stocks less attractive to buy, and higher rates reflect strengthening inflation and economic demand. Earlier this month, the 10-year Treasury yield was 1 percentage point under the expected rate of inflation for the next year, according to data from the St. Louis Fed; but now the yield stands at just 0.65 percentage points less than inflation, making investors nervous about the momentum in rates.
Rising yields often accompany expectations for higher earnings, but the unusually sudden pop in rates is weighing on stock valuations. The pain is most acute for growth companies, as they expect a relatively large share of their profits down the line, and higher rates erode the value of future cash flows. The Vanguard S&P 500 Growth Index ETF (VOOG) tumbled 3%, while its value counterpart (VOOV) fell 1.9%, indicating that shares of those typically mature companies were caught up in Thursday’s profit-taking.
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Value stocks, previous to today, had been sheltered by upbeat near-term profit estimates backed by expecations for increased Covid-19 inoculations and fiscal stimulus. The value ETF is up 3% through Thursday’s close from Feb. 12.
But with the latest gains, rates may have gotten too out of hand for even value companies.
“Thursday’s stock market declines are largely driven by the 10-year Treasury yield breaching the crucial 1.5% level,” wrote James McDonald, CEO and chief investment officer of Hercules Investments, in emailed remarks to the press.
Not even positive economic data could keep stocks from what seemed like a free fall. Jobless claims for the past week came in at 730,000, a more comforting result than the expected 845,000, and lower than the previous reading of 841,000. Durable-goods orders rose 3.4% month-over-month in January, more than triple the expected rise.
The economy is getting back on its feet. The problem is that bond yields are reflecting this too quickly for the stock market to handle.
Write to Jacob Sonenshine at [email protected]
